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Circular No.: 78/52/2018-GST
Date of Circular: 31st December 2018
Relevant Sections and Rules:
- Integrated GST Act, 2017:
- Section 2(6): Definition of export of services
- Section 13(2): Place of supply of services
- Section 8 (Explanation 1): Establishments of the same person
- Central GST Act, 2017:
- Section 5(3): Reverse charge on import of services
Summary of Circular:
This circular provides clarification on the treatment of export of services when an Indian exporter outsources a portion of the contract to a foreign entity, and that entity directly provides services to the recipient located outside India.
- Tax Structure in Export with Outsourced Services:
- Two supplies are involved:
- (i) Export of services from the Indian exporter to the foreign recipient (full contract value).
- (ii) Import of services by the Indian exporter from the foreign subcontractor (for the outsourced portion).
- The Indian exporter must:
- Pay IGST on reverse charge for the imported service component.
- May avail input tax credit of IGST so paid.
- Realization of Foreign Exchange – Special Clarification:
- Even if the foreign recipient directly pays the foreign subcontractor, and the Indian exporter receives only part of the payment, the entire contract is still treated as export of services provided:
- (i) IGST is paid by the Indian exporter on the foreign input services.
- (ii) The RBI permits part of the export consideration to be retained abroad (via general instruction or specific approval).
- Illustration Provided:
- ABC Ltd. (India) gets a $5,00,000 contract from a US client.
- It outsources 40% of the work to XYZ Ltd. (Mexico).
- The US client pays:
- $3,00,000 to ABC Ltd.
- $2,00,000 directly to XYZ Ltd.
- ABC Ltd.:
- Raises invoice for full $5,00,000 → qualifies as exporter.
- Pays IGST on $2,00,000 (import from XYZ Ltd.) under reverse charge.
- Avails ITC for IGST paid.
- Export is valid if RBI permits retention abroad of $2,00,000.
Source: Circular No.: 78/52/2018-GST